AsianFin -- Volkswagen on Wednesday warned it expects full-year operating profit to land at the lower end of its guidance, as rising electric vehicle costs and escalating trade tensions weigh on the auto giant’s bottom line.

The company reported a 40% drop in first-quarter earnings and now projects an annual operating margin closer to 5.5%. Net cash flow is expected near the bottom of its €2 billion to €5 billion forecast, while net liquidity is projected at around €34 billion ($38.7 billion).

Volkswagen said surging battery-electric vehicle sales—more than doubling in Europe during the first quarter—put additional pressure on margins, highlighting the profitability gap legacy automakers face in the EV shift compared to traditional combustion engine models.

“We need to ensure a competitive cost structure alongside our strong offering of vehicles to stay successful in a rapidly changing world,” Chief Financial Officer Arno Antlitz said in a statement.

The warning follows Porsche's move on Tuesday to slash its full-year outlook after a sharp margin contraction in the first quarter.